None of this information is meant to replace the advice of a trained professional. Don’t sue me. That being said, in my humble opinion, if you found this website you are more than capable of getting started in this process.
Credit Card Concepts:
- Interest – Interest is, of course, the % amount that you will be charged each month for having balances on your cards that you do not pay off all the way. Interest rates can range from 0% to about 25%
- Fees – Some credit cards charge a yearly fee for you just to have the card. American Express is a good example. Plus, if you make a late payment or go over your balance they will also charge you a fee.
- Credit score – Three companies control and own your credit score: Equifax, Experian, and TransUnion. http://www.annualcreditreport.com will give you a free credit report every year. I use www.freecreditreport.com because it gives you advice on how to increase your score based on what your credit history is.
- APR Annual Percentage Rate – The amount of interest you will have to pay each year.
- Visa, MasterCard – are simply the companies that process the transaction, they are not the ones lending you money.
What is a Credit Score?
Credit scores are simply a point system that financial institutions use to determine who is trustworthy enough to lend what amount of money to.
There are 3 Credit score companies. Equifax, Experian, and TransUnion. Each time a bank or lender wants to know your score they pay a small fee to one or all three of these companies and the companies let them know your score.
Banks and financial institutions send these companies data about you whenever you interact with them.
Tip: A good thing to know is that if you mistakenly forget to make a payment to your credit card, you can call up the credit card company, pay the minimum balance, and most times they will not let the credit score companies know that you made a late payment. Thus, your score will remain good. If, however, you pay your electric bill late, they are not as interested in helping you. After all, it’s not like you can choose to do without electricity.
What is the score based on?
It’s a complicated equation based on statistical analysis. So instead of drawing a formula, I will simply tell you what makes your score go up and what makes it go down.
Late payments - Down
Long credit history (How long have you had the accounts that you use to borrow money e.g. credit cards) - UP (the longer the better…never get rid of a card just because you don’t use it anymore, unless there is an annoying annual fee. Put it in a drawer and forget about it.
Good ratio of balance to credit - Up (If you have $1000 worth of credit and you have used up $900 of it, that’s not very good. However, without paying off that $900, you can simply get more credit. Let’s say that you get $5000 worth of credit. Now it’s only a $900 to $5000 ratio, and that’s not as bad.
Getting a new line of credit - Down (temporarily…if you get a new line of credit and then use it responsibly over the course of 6 months, you will find that your score has risen overall.)
Having your credit checked - Down (Each time your credit is “hard checked” by a lender your score goes down just a little. If, however, you want to see your own score, don’t be afraid to check it every day. That’s what is called a “soft check”.
I have no credit. How to establish credit:
You have two options…
1. Go to a retail store, like Sears or Home Depot and apply for a retail credit card. You will likely only be able to use this credit card at their store. Buy one thing (hopefully something you were going to buy anyways.) Then file the card away. Don’t carry it around with you. When the bill arrives, pay it in full. Wait 3 months and you should have an established credit score. It wont be very high, but it’s enough to get you an official credit card from a major lender.
2. If you have a close friend or family member who has an ok score and is willing to co-sign with you, do it.
I have a little credit. How do I raise my credit score?
The hands-down best thing to do is call your credit card companies every 3-6 months and ask for more credit / higher balance. You will be surprised at how eager they are to give it to you. Tell them that it’s been a good year and that you’re going on a vacation and don’t want to split the trip up amongst all your credit cards. You would rather just put it all on their credit card.
If you are not going to make any major purchases in the next 6 months, sign up for a few more credit cards. Be sure to get ones without fees, and use them once. Pay them off and put them in the drawer.
Open those “Pre-Approved” letters you get in the mail. If you’re pre-approved, that means they do not need to do a credit check on you to give you a line of credit. Read it carefully and sign up.
How do I check my credit score?
www.annualcreditreport.com is free but you can only use it once a year.
www.freecreditreport.com is free the first month, then it’s a monthly subscription fee. It gives you tips on how to improve your score and keeps a nice history for you.
What’s the best kind of credit card?
The most ideal kind of card is as follows (remember, it’s hard to get all these attributes, but try to get as many as possible.)
- No annual fee
- Pre-Approved
- 0% APR
- Automatic Available Credit Increase
- Major reputable company
0% APR?
Yes, people will give you money for free at least for a little while.
They are banking on the fact that you will be irresponsible and fill that card up, and then not be able to pay it off when the 0% time runs out.
Also, if you miss just one payment the new APR will kick in early, and it might be very high.
To be clear… You get a card that has a 0% APR introductory rate on it. You go buy a couch with it. You sit in your couch for a year without paying it off. You make your minimum payments usually $15 a month. When the time comes that your card is going to switch over to the standard APR rate you pay off the entire balance. You, my friend, have borrowed money with out paying a dime for it. A great thing to do is on the day you buy your couch, open up a CD with the money you would have spent on the couch. When it comes time to pay off the card, cash in the CD and put the interest in your pocket.
Transfer Balance?
If your score is high enough you will get offers from credit cards you have, and even ones you don’t, to transfer your balances of other credit cards onto their credit cards.
It will cost you about 3-5% of the transaction
I have a great example for you. I had $3000 left to pay off on my Van at 6.25%. Not bad. It would take me about a year to pay that off at the rate I was going. A credit card company sent me a 0% percent balance transfer offer, with a 3% transfer fee. I went for it and transferred the $3000, which was in a Flex-line loan, to the credit card. It cost me $3090.00 with the 3%. The bank I had borrowed the money from then sent me the title to my van. I then called up my car insurance agent and asked them to lower my coverage, since I was no longer contractually obligated to have full coverage. I lowered it to the legal coverage. I save $240 every 6 months. invest that $3000 in a CD at 2%. I will pay it off, having saved $480 in insurance and having made $60 in a CD. I will not have to pay the $72 of interest I would have at 6.25%, and the best part is that when it’s all paid off my credit will go up, because I will have gotten rid of the flex -line and replaced it with a fixed-line of credit that will sit there without any money on it, adding to my overall available credit.